There's Been No Shortage Of Growth Recently For Oil and Natural Gas' (NSE:ONGC) Returns On Capital - Simply Wall St

There's Been No Shortage Of Growth Recently For Oil and Natural Gas' (NSE:ONGC) Returns On Capital - Simply Wall St News

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There's Been No Shortage Of Growth Recently For Oil and Natural Gas' (NSE:ONGC) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Oil and Natural Gas ( NSE:ONGC) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Oil and Natural Gas:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = ₹590b ÷ (₹6.1t - ₹1.3t) (Based on the trailing twelve months to March 2023).

Therefore, Oil and Natural Gas has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Oil and Gas industry.

Check out our latest analysis for Oil and Natural Gas

In the above chart we have measured Oil and Natural Gas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Oil and Natural Gas here for free.

What Can We Tell From Oil and Natural Gas' ROCE Trend?

Investors would be pleased with what's happening at Oil and Natural Gas. Over the last five years, returns on capital employed have risen substantially to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 40% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Oil and Natural Gas' ROCE

In summary, it's great to see that Oil and Natural Gas can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 28% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 2 warning signs for Oil and Natural Gas that we think you should be aware of.

While Oil and Natural Gas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Oil and Natural Gas is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
View the Free Analysis

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

About NSEI:ONGC

Oil and Natural Gas

Oil and Natural Gas Corporation Limited explores for, develops, and produces crude oil and natural gas in India and internationally.

Established dividend payer and good value.

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